Over the last five years, the life settlement marketplace has moved toward an environment where most of the population is now protected through regulation.
The 39 states implementing regulation of life insurance settlements have been guided by models proposed by the National Association of Insurance Commissioners and the National Conference of Insurance Legislators. Both of these models were updated in 2007 to address the changing environment.
The market challenges in 2007 were very much related to commission disclosure, bidding practices and stranger originated life insurance abuses. Today’s sophisticated capital sources, with a focus on asset quality, have largely resolved those issues. As the marketplace has continued to evolve, new challenges in the consumer experience must be addressed, including, perhaps, the structure of the marketplace itself.
With the increasing sophistication of capital sources, a trend has developed where funders actively approve critical aspects of the settlement transaction, including the pricing and contracting of due-diligence reviews. The higher cost of capital, longer life expectancy underwriting opinions and less demand for alternative investments, among other changes, have driven up investor return requirements, resulting in lower offers for consumers. These changes in marketplace dynamics bring into question the need for the number of intermediaries currently necessary to settle a policy.
Most sellers work through their life agent, a broker and a provider to reach the other principal in the transaction, the buyer, or funder. The role of the life agent has remained largely constant through the years. With a duty to the selling client, the life agent identifies situations where a life settlement may be appropriate for a client who, due to changing needs, is considering lapsing or surrendering a policy.
Typically, the life agent turns to a specialist settlement broker who can help assess the marketability and economic value of the policy through market knowledge combined with financial modeling. With the information provided by the broker, the life agent and client can assess options and determine the best course of action for the circumstance. If the client elects to pursue a settlement, the settlement broker will prepare the policy for market, ensuring regulatory compliance, and distribute the policy to licensed providers in a manner that protects the client’s private health and financial information.